Tax

Here are some important tax strategies for your aircraft operations that could help you overcome passive loss limitations and maximize your deductions.

Understanding Passive Activity Limitations

The IRS’s passive activity loss rules can prevent you from using aircraft-related losses to offset other income. If the tax code classifies your aircraft operations as passive, you may be stuck with unused losses until you dispose of the aircraft or generate passive income in future years.

Avoid Common Traps

Trap 1. Leasing your aircraft in a separate entity. Leasing the aircraft to your business through a separate entity can trigger passive loss rules. However, you can avoid this classification by 

• ensuring the lease qualifies for exceptions (such as short-term leases or providing a flight crew) and 
• demonstrating material participation (e.g., 500 hours of involvement annually).

Trap 2. Leasing to third-party charters. Leasing your aircraft to a third-party charter like NetJets may convert your business asset into a rental asset, subject to passive loss rules. It’s best not to engage in third-party leasing if you want to claim the aircraft losses.

Strategies to Overcome Passive Loss Rules

Material participation. Ensure you meet one of the IRS tests for material participation in your aircraft leasing activity. This can help establish the activity as non-passive, allowing you to deduct the losses.

Grouping election. Consider grouping the aircraft activity with another active business (like your medical practice) to treat both as non-passive. This strategy helps avoid passive loss limitations and allows for deductions, provided the grouping constitutes an appropriate economic unit.

Restrictions for Closely Held C Corporations

If your business is a closely held C corporation, the grouping election does not apply. You must consider other strategies to avoid the passive loss limitations.

As you can see, getting the deductions you want from your aircraft is tricky. If you want to discuss tax strategies for your aircraft operations, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 1, 2024

Based on IRS regulations, club dues are generally not deductible if the organization’s principal purpose is to conduct entertainment activities for its members. 

However, there are exceptions for civic and public service organizations, such as the Lions, Rotary, Kiwanis, and Civitan clubs, which the IRS recognizes as not being primarily for entertainment.

The situation is less clear for clubs like the Masons or Shriners because the IRS did not name them in its regulations. 

The key determinant for deductibility is whether the organization’s principal purpose aligns with civic and public service rather than entertainment. If a member, such as a Mason or a Shriner, can reasonably state that their involvement primarily serves a civic purpose, similar to that of the Lions or Rotary clubs, then the dues may be considered deductible.

It is also important to ensure that any dues claimed as deductions meet the “ordinary and necessary business purpose” criteria set forth by the IRS. For example, membership in these organizations could provide business networking opportunities or enhance your stature in the community, which could qualify as an ordinary and necessary business expense.

If you want to discuss deducting the clubs you belong to, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 27, 2024

The story of James Maggard, a minority shareholder in an S corporation, highlights some significant lessons about the importance of vigilance and the need for proper oversight in businesses with multiple owners.

Maggard, who owned 40 percent of the corporation, discovered too late that his fellow shareholders looted the corporation, which led to severe financial and tax consequences for him. Despite being unaware of their misconduct, Maggard was ultimately responsible for taxes on over $784,000 of income he never actually received.

Here are a few key takeaways from the Maggard case for minority shareholders to consider.

Trust but Verify

Even when working with family and friends you trust, it is crucial to maintain checks and balances within the organization to prevent potential misuse of company funds or resources.

Assert Your Rights

As a minority shareholder, you have rights and should assert them when necessary. If you notice irregularities, such as meetings happening without your knowledge or discrepancies in financial statements, it’s essential to take immediate action.

Seek Professional Guidance

Working with a qualified tax professional is vital when dealing with complex business matters, especially those involving taxes. Proper guidance can help prevent costly mistakes and ensure that all required documentation, like K-1s, is appropriately managed.

Stay Informed and Proactive 

If you are entitled to receive specific financial documents such as K-1s, and you don’t receive them, you must promptly address the issue. Failure to do so can result in severe tax liabilities and other financial consequences.

Maggard’s situation underscores the importance of active involvement and due diligence in protecting your financial interests.

If you want to discuss the controls you have in place to protect your financial interests, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 24, 2024